The European Commission (EC) understands that there are challenges of adapting the current corporate income tax rules to the current century. It recognizes, however, the requirement for a new tax framework that is up-to-date with digital business models and emphasizes the need for a worldwide solution to the challenges of taxing the digital economy. Therefore, the EC has decided to propose comprehensive and targeted solutions at EU level as well. The EC issued its proposals on the taxation of the digital economy on 21 March 2018. The proposals contain a number of parts, the most important of them being the suggestion for a Directive stating the rules relating to the corporate taxation of an important digital presence, the recommendations to the above suggestion, and a proposal for a Directive on the common system of a digital services tax on revenues.
The proposal contains two new draft EU Directives. The first draft Directive is an all-inclusive long-term solution and the second is an interim solution to quickly address the issue.
B. The draft Directive on the corporate taxation of an important digital presence
This suggested Directive represents an (long-term) all-inclusive solution within the corporate tax systems of the Member States. It states rules for establishing a taxable link in case of a nonphysical commercial presence of a digital business ("significant digital presence"). More precisely, a digital platform shall include a significant digital presence if one or more of the following conditions are met:
- The part of total income gained in that tax period and resulting from the supply of those digital services to users located in that Member State in that tax period exceeds EUR 7,000,000;
- The number of users of one or more of those digital services who are situated in that Member State in that tax period exceeds 100,000;
- The number of business contracts for the supply of any such digital service that are concluded in that tax period by users situated in that Member State exceeds 3,000.
In addition, the suggested Directive sets out the principles for assigning profits to that significant digital presence. For the assigning of profits, a functional analysis should be completed.
The economically important activities performed by the significant digital presence through a digital platform, constitute, inter alia, the following activities:
- The collection, storage, processing, analysis, deployment and sale of user-level data;
- The collection, storage, processing and display of user-generated content;
- The sale of online advertising space;
- The making available of third-party created content on a digital marketplace;
- The supply of any digital service not listed in points above.
Furthermore, in computing the assigned profits, the profit split method should be the default unless the taxpayer can prove that there is another method (based on internationally accepted principles) which is more appropriate based on the findings of the functional analysis.
The suggested Directive shall apply to all taxpayers that are subject to corporate tax in one or more Member States and to entities resident for tax purposes in a non-EU jurisdiction, in regards to their significant digital presence in a Member State. It shall not affect an entity if this is resident for tax purposes in a non-EU jurisdiction that has a double tax convention (DTC) in place with the Member State in which there is a significant digital presence unless:
- That DTC includes similar provisions on a significant digital presence and the assigned profits thereto to those of the draft Directive, and
- Those provisions are in force.
The EC suggests that the Directive should apply per 1 January 2020.
C. The EC's Suggestion regarding the corporate taxation of a significant digital presence
In the cases where the proposed Directive mentioned above would not apply, the EC's Suggestion determines how Member States should change their DTCs with non-EU jurisdictions to reflect a significant digital presence, and assignment of profits thereto as per the above Directive.
D. The draft Directive on the common system of a digital services tax on revenues
This second suggested Directive represents an interim solution. It introduces a Digital Services Tax (DST) at EU level at a rate of 3% on gross revenue (net of VAT and other similar taxes) resulting in the EU by the following activities (certain exceptions are applicable):
- The placing on a digital interface of advertising targeted at users of that interface;
- The making available to users of a multi-sided digital interface which lets users to find other users and to network with them, and which may also enable the provision of primary supplies of goods or services directly between users;
- The forwarding of data gathered about users and created from users' activities on digital interfaces.
Only entities with both total annual worldwide (i.e. not only within the EU) income above EUR 750 million and total annual taxable digital revenues in the EU above EUR 50 million would be subject to the DST, regardless of whether they are incorporated in a Member State or in a non-EU jurisdiction.
The suggested Directive also sets out rules regarding the place of taxation of the DST which is based on the location of the users of the taxable service.
The suggested Directive suggests the creation of a simplification mechanism in the form of a One-Stop-Shop for taxable persons with DST liability in one or more Member States.
The DST becomes due on the next working day after the end of the tax period.
The EC suggests that this Directive should also apply per 1 January 2020.
The EC's suggestion will be sent to the Council and the European Parliament. The Directives require to be officially adopted however it is understood that there will be important discussions as to the suggested directives and it remains to be seen whether the required unanimity can be achieved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.